One in five short-term auto title loan borrowers have their vehicle seized because they cannot pay the loan, according to a study released Wednesday by the Consumer Financial Protection Bureau.
The CFPB found in its 24-page report that auto title loans paid in full in a single payment make up less than 20% of a lender’s overall business. Approximately 80% of borrowers have to renew or take out another loan because they cannot pay the lump sum plus interest and fees when it is due, the CFPB said.
With the CFPB expected in a matter of weeks to issue the first national regulations of the $38.5 billion payday lending industry, given the severity with which it views auto title loans in its study, it’s probable the agency will seek to drastically curtail them in the payday lending measure or via other means.
The CFPB analyzed nearly 3.5 million single-payment auto title loan records originated by nonbank lenders in storefronts from 2010 to 2013. There are 8,000 auto title lenders and the short-term loans are available in 20 states. An additional five states allow only auto title loans repayable in installments. The CFPB is expected to issue a proposal on installment lenders at some point this year.
Approximately 2 million consumers, or 1% of the U.S. adult population, use high-interest auto title loans every year, according to a report last year by the Pew Charitable Trusts. Pew found that auto title loan payments consume 50% of an average borrower's paycheck.
The report analyzed patterns of reborrowing, when a loan is rolled over by paying a fee to extend the loan another 30 days, or a subsequent loan is taken out soon after a previous one is paid off. More than two-thirds of auto title loans are made to borrowers who take out seven or more consecutive loans in a year, the CFPB found.
Auto title loans are $700 on average and must be repaid within a month plus fees and interest. The loans have an effective annual interest rate of 300% or more. While they are marketed as so-called single-payment loans, most borrowers need to take out several loans to repay the first one. Additional borrowings commonly adds more fees and interest to the original loan, turning a short-term emergency loan into what the CFPB calls "an unaffordable, long-term debt load for an already struggling consumer."
"Our study delivers clear evidence of the dangers auto title loans pose for consumers," CFPB Director Richard Cordray said in a press release. "Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor's office."While auto title loans are less widely used than payday loans, they are made for larger amounts and the two products are similar in structure, cost and business model. The borrower provides the lender with the title to the vehicle, which generally must be owned. The vehicle's value is usually the primary consideration for the amount that can be borrowed. A lender can repossess or sell the vehicle to satisfy the amount owed if loan payments are not made on time.